GST, land tax and house prices

The federal treasurer confirmed it in May this year, when he said Australia’s tax system is up for review. It followed a federal government discussion paper which suggests Australia relies too heavily on corporate and income taxes and not enough on consumption taxes like the GST.

The Re:Think paper found the government collected about 70% of its revenue from company tax and personal income tax. That, the document warns, will discourage hard work and investment, creating the potential to harm Australia’s economic growth in years to come.

There’s been plenty of talk about GST being increased, with figures of 12.5% and 15% being bandied around. Even former treasurer Peter Costello called for the base of GST to be broadened.

The Property Council of Australia has called for the GST to be increased to 12.5% in addition to imposing a 0.25% universal land tax, which would then raise enough money to abolish stamp duty on property purchases and cut the company tax rate to 27%. The Council believes that stamp duty is an “opportunistic tax grab” and that a higher GST and the universal land tax would increase economic wellbeing by just over $10 billion per annum by getting rid of taxes that stymied economic activity.

“We can both grow the economy and raise more revenue if we rely on a better mix of taxes than what we do today,” Property Council chief executive Ken Morrison told the Australian Financial Review. “This means being bold enough to embrace GST reform to abolish a range of inefficient state taxes.”

Conversely, a number of banks and property developers say that if GST is increased to 15% or if it’s applied to financial services, it would force house prices up. Peter Icklow, ceo of housing developer, Monarch Investments was quoted as saying that it would whack another $50,000 on every new home.

New homes are subject to the GST under the current rules, which adds roughly 10% to the price. Those buying established homes pay no GST.

The UDIA (Urban Development Institute of Australia has also cautioned against raising the GST rate, as it could push up the cost of new housing substantially at a time when housing affordability is already a major issue.

Vice president of the UDIA, Michael Corcoran said with housing prices at “record levels”, increasing the number of new homes built was essential to solving the affordability crisis.

If a GST increase only applies to new houses and apartments, prices must go up, Mr Corcoran said. And that would have a spill-over effect on established housing. In addition to home buyers, he said that developers would be forced to reassess whether new projects were viable, as a 50% tax hike would “make significant inroads” into their profit margins.

“And this will impact on their ability to raise finance by demonstrating that the project is feasible,” Mr Corcoran told news.com.au.

Mr Corcoran called for a general land tax to be considered instead of raising the GST.

The Housing Industry Association (HIA) has also suggested a broad-based land tax, which would replace stamp duty. The HIA is pushing for new properties to be exempt from any increase in the GST, with HIA chief economist Harley Dale saying if GST hit 15% the impact on the sector would be profound. He also predicted a “sharp decline” in construction.

“There would be a significant reduction of new housing from both an investor and owner-occupier perspective,” Mr Dale said.

The HIA has also warned state and federal leaders that increasing the GST on new housing could price many Australians out of home ownership.

“Adding another five per cent in the GST on top of the price of a new home will put housing out of reach of many people that are trying desperately to get into the market,” said Graham Wolfe, HIA chief executive industry policy and media.

He asked state and federal leaders to exempt housing from any GST increases due to existing levies, taxes and charges on new homes and a growing need for housing stock spurred by population growth. “Increasing the burden on home buyers should be a no-go area for governments if they are really concerned about housing affordability,” Mr Wolfe said.

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Lisa started her working life as a property and financial journalist, working for media outlets including BRW, Radio 3AW and Australian Investment magazine. She turned her hand to PR and opened a boutique PR consultancy in 2001.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.